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The new urban imperative for secondary cities

Linking policy-making and the New Urban Agenda with recent agreements on climate change and disaster risk reduction offers a strategy for financing the critically needed investments in today’s fast-growing intermediate cities.

The dust has settled on last month’s Habitat III conference on urbanization, Quito hotels have returned to their regular November occupancy rates, and attention has switched across the Atlantic to the COP 22 climate conference currently taking place in Morocco. But has adoption of the Habitat III strategy — 20-year global guidelines on sustainable cities known as the New Urban Agenda — provided workable solutions for secondary cities in developing countries?

To be sure, the challenge is still there. Two-thirds of the world’s population is projected to be urban by mid-century, with urbanization trends expected to be particularly high in Africa and Asia. But what types of towns and cities will urban dwellers be living in?

“Close to half of the world’s urban dwellers reside in relatively small settlements of less than 500,000 inhabitants, while only around one in eight live in the 28 mega-cities with more than 10 million inhabitants. The fastest-growing urban agglomerations are medium-sized cities and cities with less than 1 million inhabitants located in Asia and Africa,” according to a 2014 U. N. report.

Meanwhile, the report warns, challenges around sustainable development will become increasingly concentrated in urban areas, “particularly in the lower-middle-income countries where the pace of urbanization is fastest.”

The United Nations Capital Development Fund (UNCDF) is mandated to serve the world’s 48 so-called Least Developed Countries that include these fast-urbanizing “secondary cities”. Here, the scale of the challenge requires something greater than an agenda, such as the one adopted last month. This is a New Urban Imperative!

Notwithstanding notable exceptions, many secondary cities in already urbanized parts of the world provide relatively secure livelihoods in relatively liveable environments for relatively stable populations. Without the equivalent investment per capita, however, secondary cities in the 48 Least Developed Countries may not reach the same levels. This could encourage continued migration to the mega-cities and beyond, particularly given growing agricultural productivity and reduction in rural employment.

Furthermore, climate change means that new forms of urbanization and construction are necessary to build resilience and to limit temperature growth to 1.5 degrees. For example, the world is supposed to find alternatives to concrete and steel. Yet secondary cities in Least Developed Countries will not be able to withstand the effects of climate change (or contribute to its mitigation with new construction methods) without the similar levels of investment per capita as their richer counterparts.

Clearly, municipal finance for secondary cities is a major challenge of our time.

How to blend finance

The New Urban Agenda — see the final text here — was adopted a little more than a year after the international community finalized an agreement on how to pay for the next 15 years’ worth of international development, a strategy known as the Addis Ababa Action Agenda. Both of these documents call for what’s known as blended finance, meaning a combination of public-sector grants and loans that leverage private-sector financing.

“Many secondary cities in already urbanized parts of the world provide relatively secure livelihoods in relatively liveable environments for relatively stable populations. But without the equivalent investment per capita, secondary cities in the 48 Least Developed Countries may not reach the same levels.”

In particular, both of these agendas encourage domestic resource mobilization, meaning more efficient national tax systems and other ways of raising local funding, rather than relying on international aid. They also prioritize investment from domestic capital markets, including banks, pension funds and more.

Crucially, the New Urban Agenda also makes clear that central-to-local transfers, or intergovernmental fiscal transfers, remain a key element of municipal finance in both developed and developing countries, and are necessary to secure the type of blended finance being discussed. This is significant. Richer central governments (and state governments in federal systems) transfer significant amounts directly to local governments for their discretionary capital and current expenditure — up to 5 percent of gross domestic product in the European Union, for instance. This in addition to specific earmarked grants.

These proportions have remained broadly steady, despite the squeeze on fiscal revenues since the 2008 global economic crisis. Yet finance ministers may be tempted to use the “excuse” of the Addis Ababa Action Agenda to reduce central-to-local transfers and inform city mayors instead that they are free to do “deals” with the private sector in order to make up the shortfall.

Blended finance is like a smoothie: The taste of what comes out depends on what goes in. It should be about public funding leveraging private funds for a positive development outcome. This cannot be done if the public funding is not there in the first place.

The form of the finance will to some extent determine the form of the city. Infrastructure investments may sacrifice liveable and resilient design if the right blend is not possible. Instead, for example, cities may feel financially obliged to trade their land, draining river floodplains or pouring concrete on green space so that the investment can go ahead.

While participants at Habitat III heard about the success stories in larger cities, it is easier said than done for many secondary cities to deploy the types of blended finance mechanisms and business models discussed at Addis.

During Habitat III, one plenary session heard of these dilemmas. On the one hand, one country’s representative proposed the option of selling land upon which slum dwellers are living to relocate them to cheaper land elsewhere, thus allowing the local government to realize that value. On the other hand, other countries spoke of the need to secure tenure rights and public open space.

Effective engagement with the private sector requires a strong public sector, something that is not always present in secondary cities in developing countries. Poorly designed blended finance and weak municipal capacity may not always deliver sustainable and liveable results. At worst, it could mean a reduction in urban quality and sustainability.

So now that the New Urban Agenda is finalized and adopted, how do we ensure that it promotes quality secondary cities?

Climate, resilience links

We suggest closely linking the New Urban Agenda with the commitments in two other major agreements struck last year — the Paris Agreement on climate change and the Sendai Framework on Disaster Risk Reduction. Governments in Least Developed Countries have already signed onto both of these.

“Linking” here means local governments planning and designing their investments according to the internationally agreed standards and mechanisms for monitoring and guiding sustainable development. By doing so, they would be contributing to the “nationally determined contributions” (NDCs) that countries have pledged to reduce their carbon emissions and prepare for the effects of climate change under the Paris Agreement, which came into effect this month.

This would then make their investments eligible for concessional finance from the implementation mechanisms set up by the Paris and Sendai agreements, thus both reducing the cost and strengthening the blend of financial partners. In turn, this would entice domestic capital markets — in particular, institutional finance and pension funds — to enter into the sorts of long-term arrangements required for infrastructure finance. Currently, this is not happening at the scale that will be required in the coming decades.

Linking in this way roots blended finance in global goals. Concessional finance will be dependent on verifiable progress against the NDCs, thus providing some safeguards and assurance on the quality of the outcome. UNCDF is working with partners in both local and central governments to promote mechanisms such as the Local Climate Adaptive Living Facility (LoCAL) that enable this form of blended finance and connect local governments to climate finance for both public and private investments

Central governments play an important role in implementing these mechanisms as part of their local government funding systems. This is not a competition about central funding vs. local resources; nor is it a zero-sum game about central vs. local borrowing. Rather, it is an imperative. Central and local government need to come together to ensure that cities assume their place at the heart of the implementation of the actions needed to secure our survival on the planet.